UK Chancellor of the Exchequer Jeremy Hunt presented a “budget for growth” to boost business investment, productivity and employment. While raising headline corporate tax rates, his budget offers tax breaks for investment.
Hunt’s decision to raise taxation from 19 per cent to 25 per cent for companies earning more than £250,000 ($300,000) defies pleas from Conservative members of parliament and the Confederation of British Industry. They fear that the higher rate will deter the much-needed foreign investment in the UK.
Countering this criticism, he claimed that only 10 per cent of British companies would pay the higher rate of 25 per cent.
“Businesses will be able to offset 100 per cent of their UK investments in infrastructure, factory and machinery against tax,” he said.
“Companies that spend more than 40 per cent of expenses on research and development can claim £27 for every £100 spent,” Hunt said. “Smaller businesses can deduct every single pound invested in IT equipment, plant or machinery from taxable profits.”
His playbook will ring familiar to Singapore’s entrepreneurs. Singapore’s Finance Minister Lawrence Wong extended and enlarged tax incentives to promote investments in Budget 2023 that was announced in February.
The new incentives will cut the UK’s corporation tax by an average of £9 billion a year, the UK Office of Budget Responsibility (OBR) said. But they are also expected to raise total UK business investment by 3 per cent each year.
Computing and life science businesses, in particular, would benefit from these incentives and relaxation in regulations, Hunt said.
Greater investments may be the boost needed to pull UK out of an economic slump. But there is no telling if the improvements will come in time to turn the fortunes of Hunt’s Conservative party.
The country’s economy is improving – evidenced by Hunt’s more upbeat countenance in the delivery of his budget statement. Instead of a former forecast of recession in several quarters and a contraction of 1.4 per cent, the OBR now predicts a gross domestic product (GDP) decline of only 0.2 per cent this year.
This will be followed by growth of 1.8 per cent in 2024 and 2.5 per cent in 2025. The OBR also forecasts a slide in inflation: from 10.7 per cent in the final quarter of 2022 to 2.9 per cent at the end of 2023.
Unfortunately, government borrowings as a percentage of GDP will remain at a high level of 92.4 per cent. And, considering the ongoing war in Ukraine, a continuing energy, a nascent banking crisis, as well as worker strikes, the UK still faces plenty of risks to those projections.
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Criticism
Opposition politicians were critical of Hunt’s budget, saying it was inadequate to fix the nation’s economic problems. Keir Starmer, leader of the opposition Labour Party, called it a “sticking plaster” for a country that needs “major surgery”.
“A country set on a path of managed decline, falling behind our competitors – the sick man of Europe once again,” said Starmer. “Thirteen years (of Conservative rule) stuck in a doom-loop of low growth, higher taxes and broken public services.”
Labour is 20 points ahead in the polls.
Stealth taxes
Hunt’s budget has also drawn criticism for “stealth taxes” – in the form of higher taxes as incomes rise to keep pace with inflation. These will hit nearly six million people over the next five years, the OBR estimated.
Britain’s tax burden heads towards a fresh post-war record of 33 per cent, estimates from the Organisation for Economic Co-operation and Development indicated. For comparison, Singapore’s is 13 per cent.
“The government remains on track to meet its relatively loose fiscal targets by only the barest of margins,” said Paul Johnson, director of the independent Institute for Fiscal Studies. “ We’re by no means out of the woods yet.”
“Looking for growth, Hunt pulled a whole range of policy levers. Overall, these look like a sensible set of changes which could have the sort of marginal, but positive, impact.”
Johnson is pleased with Hunt’s announcement that the government intended to create 12 investing zones across the UK. There will be state funding and tax relief to support businesses, infrastructure, and links with universities to foster skills. Local and international concerns will be able to profit from the zones, and there should be a lot more jobs.
Another key measure was a fiscal move to encourage senior doctors and other top professionals, who had retired prematurely, to go back to work.
The chancellor scrapped a lifetime tax-free pensions allowance limit of £1 million; and these skilled professionals can now place £60,000 of their high earnings into pensions and deduct the amount from tax. The high tax previously had discouraged many of these people from working in the National Health Service, which desperately needs experienced consultants.
© copyright Neil Behrmann. This article was first published in The Business Times Singapore . For other Asian and global articles see: https://subscribe.sph.com.sg/publications-bt/